Problem 1 The following table captures the aggregate demand and supply in the economy. Notice that over this portion of the curve, aggregate supply is upward sloping and increases at a decreasing rate with the price level (like in section 2 of the following figure). 140 Price level 135 3 130 125 120 2 115 1 110 105 100 0 5 10 15 20 25 30 Real GDP (trillions of $) The economy is currently in equilibrium with a price level of 100. A new policy sees government spending cut by $1 trillion. What is the effect of this cut on the economy? Price Level 90 Aggregate Demand (trillions of dollars) 22 Aggregate Supply (trillions of dollars) 15 95 21 18 100 20 20 19 105 110 21 21.5 18 Recap Recap Homework. Answered Consider a money market with a perfectly inelastic supply on money and a normal demand curve for money. Explain each step in the process of what might happen if there were a significant decrease in economic activity in the economy. Drag and drop options into correct order and submit. For keyboard navigation... SHOW MORE III The demand for money would fall as there is less need for money to carry out economic activity. Banks find that consumers are demanding less money at current interest rates as compared to before the decrease in economic activity The surplus shrinks. The downward pressure on interest rates would continue until there is no longer a surplus. INI The quantity demanded of money would increase as people respond to the lower interest rates. The quantity of money in the economy would be equal to what it was in the beginning. Interest rates (the price of money) would be lower Banks begin to lower interest rates in order to encourage people to borrow more money. There is a surplus in the market for money. Your